Inmaculada Martinez begins the first of a series of reports about fashion and technology, explaining why e-commerce is set to define 2012 for the luxury retail industry.

According to Forrester, the online retail market in the US alone is expected to grow to $279 billion by 2015. This likely does not account for what could potentially happen in the luxury retail market, simply because, still today, in the land of Net-a-Porter, this is uncharted territory for many household names.

The luxury industry has been built on the opposite values to those commonly ascribed to the internet. The digital environment is odorless and two-dimensional; luxury craftmanshift was always meant to be indulged in by the senses. Bentley, and the rest of the luxury car-makers, have showrooms in Mayfair, the hedge fund address of choice. When you slam the door of a £150,000 car, you hear a cushioned whoosh, the soft murmur of hand-assembled hydraulics.

Luxury has always been all about experiencing the dream at close range, which is perhaps why this centuries-old industry still refuses to take its mighty brands to the web with any gusto. But they are paying dearly for it.

Current growth predictions for the luxury retail industry in 2012 are gloomy: around 10 per cent, half the pace of 2011. This is mostly down to the mixed feelings of equity houses, who fear for the future of the overall luxury sector. Poor growth in sales in the traditional markets, Europe and North America, has resulted in very unimpressive 2011 results for groups that should be riding the Chinese dollar waves: Prada is down 12 per cent, PPR (which owns Gucci and Yves Saint Laurent) is down 1 per cent and LVMH was entirely flat for the same 52-week period.

Operating in a parallel universe of denial, nonetheless the luxury industry is well aware of the demise of some of its grander names. Kingdoms are crumbling. And the reluctance to invest in digital technologies and to deploy strategic approaches to Asia-Pacific buyers is dragging the sector to a very uncomfortable halt in growth for many.

But there is still potential, because the luxury industry is beginning to cleave into two factions: those who are investing into e-commerce and the digitalization of their brands – Burberry, Ralph Lauren, Jimmy Choo – and those who still wonder if this is at all suitable for their old world clientele. The digital luxury brands are managed with social media but without the tackiness of Groupon, and sell at retail prices equal to those offered at their stores.

What has moved them to steer their sales to the new online environment is a realisation that online profit margins outperform the others without damaging the brand, and that customer loyalty is growing because brands are able to connect with and service them everywhere and any time.

Burberry, for example, seem to have hedged against the Eurozone crisis by allocating capital for expansion into non-traditional ventures and digital technologies. The re-born British flagship rose its revenues to £574 million ($879.7 million), an impressive 22 per cent raise in its third quarter in 2011, with sales coming mostly from China.

Still, Burberry has an even cleverer strategy than just selling “aspirational dreams of luxury” to the Chinese nouveaux riches: it is also investing in technology and social media, revamping its website and getting e-commerce established on solid SAP technology. There was a myth that luxury brands had to sell at a discount online. It is dissipating, and will be exploded by the end of 2012.

In the early stage and SME market, investment in luxury businesses continues to be executed by private investors, rather than institutional ones. Compared to the online discount retail dot coms, the operating costs needed to grow a luxury brand and improve profit margins requires hefty funding because most companies feel they ought to have a physical presence.

Steve Jobs’s desire to open up a luxury store in Manhattan to sell his precious and lavishly marketed consumer electronics was conceived precisely along these lines. The early Apple stores became a Mecca for hardcore fans. They still continue to be mobbed by queues even longer than those for Louis Vuitton on the Champs-Élysées.

A flagship store or a store distribution in the right place does not sound like a bad idea to start getting wealthy tourists seek your products. But, in 2012, luxury brands won’t rely on their fleet of shops across Europe any longer.

The idea of a single flagship store is gaining traction. Check out Kirk Originals, the iconic British eyewear designers with a single concept store in Conduit street. When they’re not designing Gary Oldman’s glasses for The Dark Knight, the company is putting incredible creative efforts into Facebook campaigns and a website that literally takes you to the private corner of Tim Burton’s brain: quirky and very British, which seems to work for discerning purchasers of übercool spectacles.

There are other models to be considered. Social media campaigns on Facebook and Twitter seem to work wonders for discount sites and are hard to resist as a marketing combination for impulse buyers. Fab.com is a new US company that sells discounted furniture, jewellery and art in 72-hour flash sales. Fab.com leveraged social media to such success that it managed to attract some 1.65 million registered users in just six months. Sales grew to about $1.4 million a week.

Andreessen Horowitz recently backed the company with a $40 million series B round, based on a $200 million valuation. To my mind, this company is not really showing me anything that I did not know already. In fact, Fab.com could have been selling cat food, golf balls and auto-parts and the investment would have still been made, because it was opportunistic.

This type of investments comes with an expiry label on the tin: if online retail portfolios continue to be populated with online retail business models of 2006, brand loyalty is going to diminish their consumer attractiveness, because for every Fab.com there will be 20 more competing for the same working-class and middle-class dollar. Exit valuations will commoditize when the acquisition menu shows plenty of other players around.

But when all is said and done, smart digital strategies around superior, quality products, paired with strong e-commerce tools, will turn the non-believers around this year. In as much as we consider ourselves a nation of humble shopkeepers, it is time that our craftsmanship and digital creativity spearheaded the charge towards digitalisation.

Net-a-Porter won’t be alone for long offering  luxury at the click of a mouse. With this in mind, stay tuned for many disrupting models and challenging business in the sector to be brought to your attention in further issues of The Kernel.